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Cape Town - A significant number of financial sector stakeholders – including the CFO Forum - have objected to proposals for a new “mandatory audit firm rotation framework”.
They are arguing for a review of the initiative and for government to urgently clarify its status.
Concerns were raised about the new framework proposed by the Independent Regulatory Board for Auditors (IRBA) at a consultation meeting organised by the SA Institute of Chartered Accountants (SAICA) in Johannesburg on Friday.
“The implications of this extend far beyond the accounting profession – the broad implications are significant. There are huge costs involved for the country, its corporates and others. And the impact on the JSE, capital markets, foreign investors and shareholders could be staggering,” commented Naspers CFO Basil Sigourdos. “It cannot just be left in the hands of IRBA - government needs to step in.”
Concerns were raised by, among others, the CFO Forum, the Banking Association of SA, the JSE, the King Committee and representatives from the big four auditing firms.
“We have fundamental concerns about mandatory audit firm rotation as proposed by IRBA,” CFO Forum chair Christine Ramon said. “We urge IRBA to pay serious attention to these concerns before going any further. We also need clarity from the Department of Trade & Industry, National Treasury, the SA Reserve Bank and others.”
The CFO Forum represents the chief financial officers of a large number of listed companies in the financial, mining, telecoms, paper and packaging sectors.
As a result of the concerns, a number of stakeholders at the SAICA meeting will be conducting their own independent research into the adoption of MAFR in other parts of the world, as well as an impact assessment.
They will also research whether audit regulators are best-placed to initiate and implement audit firm rotation or whether audit firm independence is best driven through the Companies Act.
“We need a comprehensive assessment of the cost and related issues and whether the ‘investing public’ really has concerns around the independence of auditors,” said Ramon.
SAICA CEO Terence Nombembe urged government to clarify it view on IRBA’s proposal, after concern at its potential infringement on the rights of company shareholders – and in particular, its potential impact on foreign investors.
This followed criticism of the process that has been followed by IRBA and the fact that its proposal impacts on legislation such as the Companies Act, as well as on JSE regulations.
“The CFO Forum and many other stakeholders have expressed their concerns about the process to IRBA over the past few months and have been consistently ignored. We are also unable to access the research that they refer to as justification for this initiative. They are presenting a very biased perspective," said Ramon.
“IRBA seems to disregard the negative impact that its proposal will have on shareholders’ rights to appoint auditors and the many gains that have been made in ensuring the independence of auditors. Most importantly, they ignore their own pronouncement that South Africa has been ranked as the world's number one for auditing and reporting standards, for the seventh year in succession."
In Ramon's view one has to ask - as has repeatedly been done since IRBA tabled its proposal for mandatory firm rotation – that if SA has the world’s best auditing standards, why does one need to interfere with the regulatory framework in a way "that clearly has numerous significant flaws?"
Ramon and a number of other speakers, highlighted the fact that MAFR has been tried in numerous other parts of the world – “and the overwhelming conclusion is that it is a global failure”.
This was confirmed by Jeremy Jennings – head of regulation and public policy for EY in Europe – who told the meeting: “We urge that MAFR be approached with caution. It has been implemented in the EU and we ended up with a bit of a mess.
“There are numerous unintended consequences – including additional costs of at least €16bn - and we definitely don’t feel that Europe has got it right,” said Jennings.
Representatives from the King Committee and the Institute of Directors also pointed out that any changes to the appointment of auditors should be governed by the Companies Act, not only by IRBA.
“We don’t believe MAFR is the best approach – the negative consequences outweigh any benefits,” the King Committee said in a letter read out to the meeting.
“MAFR reduces the accountability of audit committees and IRBA has been unable to provide any evidence to back up its claim that there are ‘serious concerns’ about the current independence of auditors.”
This was endorsed by the Specialist Committee on Company Law – which advises the Trade and Industry Minister on company regulation – which said the Companies Act was the most appropriate statute for regulating the independence of auditors.
A number of organisations criticised IRBA for pushing ahead with its process without providing research to substantiate its arguments, or acknowledging the shortcomings pointed out by stakeholders.
